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Is Now the Perfect Time to Buy Lockheed Martin?

By Robert Stephens - May 10, 2016 at 2:56PM

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Is Lockheed Martin’s strategy and long-term growth outlook sufficiently impressive to merit purchasing its stock?

On one hand, the choice of the next president could be viewed as crucial for Lockheed Martin (LMT 0.35%), since the company relies on the government for 78% of its sales. However, with a Republican Party that's unlikely to slash military spending and a Democratic Party that may not wish to lose face when it comes to investment in defense, the presidential race may have less bearing on Lockheed Martin than appears at first glance.

What's much more important to Lockheed Martin's future is its restructuring, which has the potential to improve efficiencies and create a leaner, more profitable business in the long run. For example, Lockheed Martin has realigned its energy portfolio and has combined a range of products within a single organization in the missiles and fire control segment. It is also set to spin off government IT and technical services businesses so as to create a more focused and better aligned business, with the transaction expected to close in the second half of 2016.

Additionally, with the acquisition of Sikorsky, Lockheed Martin has expanded its product range through flagship products such as the Black Hawk helicopter, while also helping to diversify its portfolio away from the F-35 Lightining II, to which it has considerable exposure.  . As such, Sikorsky seems to be a good fit for the company, while the $1.9 billion in tax benefits set to be realized from the transaction makes it even more affordable.

International growth
The Sikorsky acquisition also expands Lockheed Martin's international operations, and this is set to be a key area of growth in the long run. In fact, international sales accounted for 21% of Lockheed Martin's total sales in 2015, but the company expects this figure to rise to 25% in the coming years.

To facilitate this goal, Lockheed Martin has expended resources into developing partnerships in specific regions so as to better align its offering with the economic and security objectives of its customers. Notable examples include the pilot training contract signed with the Australian Defence Force (worth $750 million over seven years), as well as the opening of new facilities around the globe. And with the U.S. dollar likely to weaken somewhat over the medium term as interest rate increases fall short of previous expectations, Lockheed Martin may find its task of increasing international sales somewhat easier.

Of course, a key catalyst for Lockheed Martin's profitability and share price is product innovation. On this front the company is investing heavily, with its independent research and development funding rising for the fourth consecutive year last year to $839 million. Within new products and innovation, Lockheed Martin is making rapid progress with autonomous air, ground, and undersea operations. For example, its unmanned K-MAX helicopter successfully completed a firefighting exercise last year, while its laser weapon system also offers major long-term growth opportunities.

In addition, Lockheed Martin is also investing heavily in hybrid airships, with there being the potential for safe commercial usage following the Federal Aviation Administration's approval last year. Furthermore, Lockheed Martin is positioning itself for growth within the cybersecurity space, and this presents an opportunity for it to deliver growth outside its core physical defense business. This seems to be a logical move for the company, since cyberattacks are becoming greater in volume and in sophistication across the corporate world, while cybersecurity segment growth would also improve Lockheed Martin's diversification.

Looking ahead
Because of its M&A activity, restructuring, product innovation, and long-term international growth outlook, Lockheed Martin seems to be headed in the right direction. Although its shares have risen by 190% in the past five years, there could be further capital gains ahead, and as such, it seems to be a worthwhile purchase for the long term.

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Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
$420.71 (0.35%) $1.46

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